Posts by Tim Matakovich

I am an amateur economist with an Austrian perspective. My goal is to dissect the modern macro-economies and give out my interpretations and prescriptions for the present short-coming of the global economy.

Bitcoin found guilty of joyriding

After many months of time away from the website, and many interesting developments in the state of the economy, I have decided to come back and analyze the current state of certain markets. Namely, this post is about Bitcoin. If you have been watching over the past few weeks we’ve seen a rollercoaster in the Bitcoin exchange. Going from roughly $900 to $1140 then all the way down to $783! All of this has happened over the past week, and the question keeps coming up as, why?

Well let’s start with Bitcoin as a currency. Ludwig V. Mises, the scholar of the Austrian credit cycle, points out in his ‘regression theorem’ that money can not exist until an existing starting point based on a commodity. Namely, that a unit must have ‘use-value’ before it can create a binary value of ‘exchange-value’. This certainly is an interesting concept that sets the cornerstone for many theorists conception of what money actually is and how it comes into existence. So if this regression theorem is true, deductively, how do we explain Bitcoin as money? Well it seems we can examine two propositions, either A) it is not a money but is just speculative asset or B) it is a money and we can find problems in our understanding of the regression theorem. Before we set out on our quest to uncover the true meaning behind Bitcoin. I have to suggest that this is in no way the scholarly article or platform worthy of introducing this theoretical application to understanding the phenomena of Bitcoin; and I assure you I will be performing much more research to hopefully bring fourth our theory to a more scholarly platform.

Initially, what we must define money as is a unit to facilitate several purposes. These purposes are a medium of exchange, unit of account, and a store of value. What this means is that money must be exchangeable throughout the general population between multiple goods, or as stated above it must have ‘exchange-value’. It must be a unit of account, or people must be able to use it as a divisor between transactions to evaluate transactions. Also, it must be a store of value or something that can be saved and then exchanged at a future date. By the definitions above we can theoretically assume that Bitcoin does in fact facilitate all three of the purposes, yet not very well. This is because the nature of Bitcoin is prone to volatility; $300 fall in one day. So economists can mainly agree that it might not be a ‘good money’ due to its volatile attributes, but we have to remember that the volatility associated with Bitcoin can be because it is relatively new and prone to more market spikes. The important knowledge we gain from understating that, though so far it is not a good money, it still facilitates all three specified above. Then we have to understand that there could be a problem with our understanding of the regression theorem. This has already been questioned by Daniel Sanchez’ great article on Bitcoin. Initially, Sanchez suggest:

“No. It does modify it. But the essential core of the Regression Theorem is completely true and indispensable to economic theory. Some proponents of Bitcoin think otherwise, but only because of a common misunderstanding of what the essence of the regression theorem is.”

Seemingly the problem with us understanding how Bitcoin became money, so to speak, is to mischaracterize what Mises was actually attempting to do with his regression theorem.

What was Mises talking about? Well, as Sanchez suggests, he was ‘tying up a loose-end’ in terms of the circular reasoning of subjective valuation into monetary theory. I.e., if money derives its value from utility, then why should money exist since utility creates value? Mises explains that money comes from a good that has use-value but engages in exchange value based on past price valuations in the onset of future orientated entrepreneurs.

What we wish to explore is not the feats this argumentation and insight of Mises brought, but rather what this actually entails. What we are suggesting here is that prices are an abstract structure, if you will, of relative relationships. Initially, what Hayek set fourth was the exploration of the subtle prices that Mises was suggesting but in a much more complex manner. Meaning, Hayek went much more in-depth in his explanation of the pricing phenomena as a way to cover-up what Mises failed to address. As Hayek shows in Prices and Production is the interconnectivity between prices and stages of orders in the production structure. What this suggests is that there is a multiplicity of prices rather than just a general price. So naturally, we must ask why must the regression theorem apply only to commodity prices? If there is a good with a ‘use-value’ which is an exchangeable good within the margins of the stages of the production then certainly there already exists a pricing structure based on historical objectivity. So naturally, there could come fourth an existence of money in the sense of a producer’s goods that is not a commodity. Perhaps Hayek’s assessment in Denationalization of Money is about this understanding that the prices within the interconnectivity of production can bring fourth currency in the market based not only on consumers goods, or commodities, but can be brought forth by any good that serves a purpose; therefore economically any good at all.

If this holds true, then we must ask what is the purpose of Bitcoin? Well it has qualities like gold, of course, though unlike gold it does not act as a ‘commodity’. Like gold, however, it acts as a hedge against inflation. Therefore understanding this aspect of the digital age there is no reason to assume that the free-market would not create multiple fiat currencies and would only resort to gold. This suggests then, that even with the highly volatile nature of Bitcoin we see that not only has Bitcoin not violated the regression theorem, but Bitcoin has grown our understanding of prices and how money can come fourth from prices.

What has been stated above is not the proper venue or construction of this theory, however it might help us further our understanding of what Bitcoin is; which this article is attempting.

Why all the volatility then? Well, the markets are suggesting that it is a Chinese induced buying spree that has skyrocketed the price and subsequently dropped it in a manner of days. Does this mean that the markets were anticipating a problem in the Chinese economy? Looking back a little under 2 years ago, we saw the trends rising on Chinese margin debts, and the massive liquidation of margin debt during the market crash in the summer of 2015, below is a graph shown:
1x-1-3

We see a big drop in Chinese margin debt, which implies an economic scare due to leveraged trading. Below we see a chart of Chinese futures,

1x-1-2

Here we see market volatility during the Chinese market crash of 2015, and therefor we can seemingly assume that the Chinese markets were attempting to hedge their losses with futures, then sold the futures in a way that flooded the market and caused a massive bubble then which burst in a manner of a short period of time.

However, it looks like Bitcoin might have bottomed out and might be back on the rise, could it be another volatile swing such as the two bounds above in the futures market? We will wait and see, in the meantime we have to ask what the Chinese markets are expecting and why they are using Bitcoin to hedge? The seeming answer would be a hedge against inflation as a means of protecting financial solvency due to a faulty currency. This could be a multitude of things, such as the USD or the Euro due to all the political havoc we have witnessed in the past year.

So to answer the daunting question, what is the ‘use-value’ of Bitcoin? Well, it seems empirically that it could simply be a hedge against inflation. Therefor the balance sheets of corporations with a multiplicity of reserves find a ‘use-value’ of Bitcoin as a hedge against inflation. So it would suggest that financial capital instruments can facilitate as money; demonstrated by Hayek in the Denationalization of Money. Therefore, this would not disrupt the regression theorem, but expand our knowledge on what it exactly entails.

Changing Economy… So What?

During the state of the union address a week ago, president Obama suggested that the economy of the United States is changing. He gave a forecast for economic “growth” as well as claimed job creation and claimed that the democrats pulled the economy out of the recession. Hillary Clinton did not leave any of this behind as she claimed that she was part of the administration that ended the great recession. They are either purposefully disingenuous or completely clueless. It reminds me of a Mark Twain quote, “Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.”

As I wrote earlier this month, the Stock Markets open is the worst in the history of the stock market. As we watch the markets drop our way into the new year, the IMF just released a new forecast where they had to cut global economic forecasts. The earnings in manufacturing is  now reporting that it is the worst earning season since 2009, as we watch the USD appreciate against commodities as well as foreign exchange. This shows that the entire rate hike of only .25%. Mainstream analysts are suggesting that we can maintain a profit recession outside the entire economy. Why would anyone invest in anything if there is a profit recession?

Well, there’s no doubt that we are in a changing economy, we are always in a changing economy. This is because people’s wants, valuations, as well as life goals constantly change. The question is how are we going to combat the downturn in the economy? Obama is assuming that he single-handedly fixed the recession caused by bush, all he did was prolong it. Today, the Chinese GDP report was released and it is the slowest growth in 25 years. Manufacturing is dropping in China, as the people’s bank decides over which stimulus to inject. The Chinese markets reacted to expected stimulus in the future. Yet at the end of the month the Fed will release their quarterly projections, and if it is negative that means the fed will have to admit we are in recession. Chinese exports are dropping  so there is really no point in the Chinese to devalue their currency. When the quarterly is released and the United States starts a stimulus on their currency, the Chinese might appreciate their currency which can lift the downward pressure on consumers in the emerging Asian markets, and re-adjust the Chinese manufacturing to domestic concerns at the expense of the dollar. Also, the Chinese will no longer buy US debt, so the trillions of dollars being soaked up by Chinese government will no longer occur; which suggests that the US economy will have a massive currency bubble pop, and if the Chinese appreciate their currency it will cause a restructure on the foreign markets. The inflationary pressure of the US combated with the appreciated Yuan will cause the Chinese long asked for Basked of currencies. This is a very likely future in the global economy. As Obama said, we are in a changing economy. Meaning, we are no longer the economic power house we used to be, and whether thats a good or bad thing, Obama’s economy definitely helped cause it

Too Little Too Late?

As the year of 2015 dwindled down to a slow close the markets sought the increased interest rate as a measure that insured financial stability as well as an economic recovery. This increase, with the promise to slowly increase rates over 2016, was a long-time waiting. Finally as financial traders and political economists released a sigh of relief as the doom days of endless QE come to a close, right?

Logically one must admit that the FED sure waited a while before being able to actually raise interest rates a historic .25% increase. Historic!? After years and years of printing money and propping up the stock market with artificial asset swaps and purchases, an increase of a .25% interest rate from a 0.25% interest rate is still lower then the Greenspan years, will help slow down the possible inflationary trends?

So while major financial analysts are now taking the position that 2016 is a year of recession, the question is what are the indicators? Well for start we see the Chicago PMI closing q4 at a horrible 42.9%, and layoffs have already started. Dow Jones is down near 500 points on the year, and retail is having a horrible ending quarter as shares dump.

All of this screams recessionary trends, yet the FED raises interest rates? This is due to the fact that the FED wanted to act like the economy is not as weak as it actually is. Currently, we see levels of dollar devaluation getting to extreme levels, and the FED is pretending to use the tools necessary to combat the inflationary trends of the currency printing. So while Janet Yellen raised the interest rates, the question of motive is still in play. Why now? Simple, because the recession is already here and in a few months from now when the FED finally accepts that we are in a recession, Yellen can reverse the interest rates and simply say that the rising of the rates were premature. Again, to escape blame from the endless QE policies.

This recession will not be an easy one, and the question then remains; what can we do to reverse the recession in the most allocative manner to stabilize the economy? Raise rates even more! Feel the blow, take the hit, power through a hard recession and liquidate all the bad assets that had been propped up by the horrid fiscal and monetary policies. We need to pop the bubble. However, what can we do in the meantime to protect our financial assets? Invest in foreign equities and hard metals like Gold. This is because Gold and Silver tend to do well in recessionary trends as well as historically during times of QE. If you look at the NASDAQ 10 yr chart you can see gold prices spike up in times of instigated recessionary tools like QE, during the great recession years, and drop when times of market confidence. This recession is going to hit like a storm, and it might be a good move to re-adjust financial assets now because this year will be a bad year for the global economy.

The real speculation everyone should be asking is if the political motives can continue to prop up wall street speculation. Yellen does not want the recession to fall at the end of Obama’s presidency; its much easier for propaganda reasons allow recessions to hit when a new president enters office. Will the FED be able to prop up Obama’s false legacy of fixing the economy? One thing is for sure, 2016 will be an astonishing year.

 

Price raise and stabilized or dramitized

Well here we go again listening to all the amazing scientists explain to us why we can now increase rates with the strengthening dollar, and again for the third or maybe fourth time this year they are predicting a rate hike. Mainly we see bull markets smashing up the prices, and an appreciation of the US dollar. This is showing economists that the economy is in an upward swing. In a sense there is “economic growth” occurring in the United States, and the Chinese markets have stabilized. At least that is what they say. Unemployment rates are low, Chinese liquidation is halted, and everything seems to be great with the american assault on thrift.

First of all the unemployment rates are dropping and the economy is “expanding”. However, there has not been any actual job growth since the recession. Rather, the dropping of the unemployment is just a re-alignment of workers in response to the inflationary measures to combat the recession. After the Chinese dollar dump there was an influx of inflationary prices for the Chinese markets, not any stable growth. With the excess reserves the United States fed initially bought back debt from overseas and by doing so it appreciated the value of the dollar, as compared to the euro. This is why the prices have been rising in certain indexes that accept currency baskets for shares. This is not any actual growth, this is market reaction to inflationary signs of adjustment due to the massive devaluation of the Chinese bull, now bearish, market.

So, then, what does that tell us? We are seeing a shift of growth into full time work from part time work and this should not be happening. Especially with wage hikes, and with obamacare regulations. Since full time job growth is rising, it means labor is transitioning. However, labor is transitioning to full time work, while the regulations are calling for more part time work. This means that we are witnessing a transition of the labor market, which occurs during an inflationary boom. When the market feels inflationary pressure it expands, not in a “market oriented” fashion based on the outcome of the market but an artificial price increase. That price increase is unsustainable because the markets have been continually propped up by global policy, and the when the prices fully re-aligns to what the market actually calls for it will collapse from the pressure of the over bloated full time industry.

This is the sign of a coming recession, no matter what other scientists say. Remember, recessions happen when no one expects it. So diversify your currency, brace for the worse because probably after the holidays, and after the Chinese lift their security restraints, the market will fight back with vengeance and we will be moving into the “next recession”, completely oblivious to the fact we never fully recovered from the last.

Lies, Lies, and Lies; or maybe “Just Politics”?


Does the functionality of the market even matter to our leading bureaucrats, or is it just another tool to lie about, and to blame for, when their programs of corruption do not reach the outcome they intended. Bernie Sanders made some interesting remarks during the democratic debate in regards to the growth of income inequality, and reasoned as to why monopolized theft (taxation) was necessary to dismantle the rapid growth of income inequality in the United States.

Well let’s take a minute and look at the reasons as to why income inequality has grown so rapidly in the past 40 years. We see a trend in the 1970s of the top wealth earners growth in regards of real wealth, rather the middle and lower class wages tend to stagnate. This occurs around the year 1976, as the top one percent start taking more and more. As for many members of society that lack an understanding in economic theory, it is very easy to fall into the Sanders slip as to why this is occurring, I.E. capitalism. Sanders makes a true assessment in regards to the cronyism that is coming out of Washington, and he definitely knows that special interest in Washington is a major key factor in the growth of income inequality. However, where does Sanders collapse? When he makes the statement that capitalism is the vessel for the rising trend of cronyism, and not statism.

In 1976 the United States officially changed its definition as to what the dollar was, I.E. no longer redeemable in gold. This meant that the central bank of the United States could now expand the dollar supply without any negative effects, besides of course the forced redemption to be paid by taxes and the robbery of the public wealth. When the central bank expands the money supply, without any specie backing, the public is now responsible for the debt that goes into the the monetary expansion, and they pay for through forms of income taxation as well as price inflation. Meaning, initially the expansion of a fiat currency depresses the standard of living for the public while increases the wealth of who that monetary expansion went to in the first place.

So, is it really any unjustifiable assumption to make when faced with why income inequality is becoming more rampant. It is not due to capitalism, rather just the opposite. It is due to governmental subsidies to the rich through monetary policies that are only possible by the theft of the majority public. So why, then, is Bernie Sanders blaming private property? His tax proposal is going to target hedge fund managers wealth, and force them to pay for public schooling for the majority of the United States. In a sense, all he is going to do is force the hedge funds to relocate their assets, increase state brainwashing facilities (public schools), increase the cost of living through heavily rampant taxation, increase outsourced business, etc etc. In a sense, Bernie Sanders will be levying socialist dependency reforms (nanny state policies) and subsidize the lower class into being duped by his policies, and dismantle the upper class while retaining the profit for the elite party leaders, i.e. Bernie Sanders.  
Rather, in his quest to target the source of income inequality, the big banks he suggested that the banks were not too big to fail and that needs to stop. Indeed, no bank should be too big to fail, no bank should have absolute market power. Then why did Bernie dismantle the Audit The Fed bill? Is Bernie Sanders being authentic in his quest to dismantle mega banks, or is he just another demagogue that will destroy our rights, trample our liberties, and expand the very vessel that has been the cause of income inequality. The Federal Reserve system.

Beginning of the end?

Major holders of US Debt, China, Russia, And Brazil have been massively liquidating US debt in what is reported as the biggest decline of US debt since “1978”. This means that other countries are initially dumping the dollar, which could be a strategic ploy by the BRICS banks. In a sense, these massive holders of debt were soaking up all the inflation the dollar devaluation has spurred, and retrospectively now amongst market slowdowns they are dumping the dollar in an attempt to increase yield returns with their domestic currency. In a sense we are seeing a global tightening of fiscal policy in response to the over devaluation, rather the United States is expanding.

However, mainstream economists are arguing that there are no market signs to even put on the breaks of expansionary policy, considering we are not seeing signs of growth it means that we need to continue to expand the money supply to stimulate the market contraction of 07 still to this day. Regardless of the ineptness of understanding markets or how they work, these economists do not even realize that we are facing a contractionary economy because we have devalued our dollar for far too long.

While initially boosting fiat paper currency and enacting an overvalued exchange rate we have created a currency bubble, and the foreign countries see this as true. So, with this historic dollar dump can it spark the stages of an overvalued currency bubble to pop? In a sense, considering we are now expanding the money supply at such a rapid pace, and yet we can no longer look at global markets to soak up the inflation  of the dollar, this petrodollar will begin contract.

As we started last week, we saw an increase in the NYSE index. This means that rather than a liquidation of domestic companies we are seeing a rise in asset prices. Is this rise in asset prices due to the dumping of the dollar? Is it due to the 0% rate change by Janet Yellen? Well, its probably a mixture of both, in a sense when these major inflation soaking countries turn around and liquidate their US debt, that debt must go somewhere. When that debt started hitting the NYSE it caused a surge of asset prices, and with that surge companies will now be soaking up the inflation of the central banks reckless printing, as opposed to foreign countries. In a sense, the already overinflated assets inside the NYSE, the ones that were in the process of liquidating the bad assets are now soaking up  more inflation, and ultimately doing the opposite of what the market should do.

This means, the stock market is yet again going into another hike in its index, then will turn around and we will see a massive liquidation in assets. As for China, it is a smart move to liquidate US bonds, however they are now taking the yuan they received from the US bond liquidation and attempting to now boost up the Shanghai Index, in a way to attempt to trick the traders of the shanghai composite. This will cause the Shanghai prices to rise while the government boosts up the prices, however, in the next few months the chinese markets will take a massive hit once the security controls are lifted. When this massive hit happens, we will see an export of capital from Shanghai, and an inflow of capital to other countries.

Stock Market Crash… Again?

At the beginning of the week on the NYSE we saw another massive liquidation of assets, thus resulting in another “crash”. The question is, whether or not this is another crash or the long awaited hangover due directly to the easy money policy that has plagued us time and time again. Such as, when we hit the subprime recession, people initially decided to opt out of taking the hit and decided to go after the “Hair Of The Dog’ approach.

When you stay up all night drinking, the next day you will  pay the consequences of the night of partying. These consequences are being sick and possibly throwing up, in a sense it is your body rejecting all the alcohol that your body has retained. After a few hours, maybe the whole day, you will be regretting the night of drinking. When you hit the worst of the hangover, you begin to feel better and eventually get back to normal. What will make that hangover more harsh is when you resort to the hair of the dog, or the drinking of more alcohol to overcome the horrid feeling you have. In the long run, your body will reject more alcohol making the hangover last longer.

This is much like an inflationary boom and the consequential  recession, the night of easy money policy creates a sense of tranquility. That we can now live beyond our means in a stage of inflationary trends, and dollar devaluation. However, once the market creeps back up and decides that we really are not able to live outside of our means; we will hit a wall and have an asset liquidation. This liquidation acts as a hangover, in the same sense that our body is rejecting the alcohol, the market is now rejecting the bad assets created by an inflationary boom. The best way to deal with the liquidation of assets, much like the hangover, is to allow the bad assets to escape the market. Thus, after the grueling process of liquidation, we will be back to a state of stability.

The worse thing to do  in the case of asset liquidation is to expand easy money, because all it will do is prolong the “hangover” and, much like the hair of the dog, cause a longer harsher recovery. This is what we see happening in the stock market right now. What’s even worse is the market is rejecting the 0% interest rate the Fed decided to continue.

Since Q.E we have seen spontaneous price inflation in financial assets, resulting in liquidation, which has sent us into a perpetual stage of constant easy money and constant liquidation. However; now our fiscal tools are preventing the easy money policy. Plain and simple, there is such high leveraged debt in the market, no one trusts the fed and their interest rate scheme anymore. The stock market took a nose-dive, and things really are not looking up for the United States right now. Now, the bureaucrats are coming up with excuses for the constant easy money policy, though what really needs to occur is for us as a society to bite the bullet, take the hit, then re-establish tight money policy to offset the years of inflation. After such has occurred, we can start allowing long term investment to take place and reintroduce actual capital into the market, rather than over-valued assets.

Janet Yellen, and the Fed, will refuse to allow this to happen. Why? Because it is her job to lie to the people in an attempt to let them know the Fed actually benefits society, rather than causes harm to it. So in the next few days, while the liquidation continues, the people at the Fed and in Washington will scramble to figure out what caused it. Anywhere from the GOP possible Gov. shutdown, or looking to blame China or Russia, in the same manner an alcoholic will say “my neighbors upset me so I’m going to get drunk tonight”. Without realizing, the market has grown dependent on the easy money policy and is now at a stage of rejection; or as the alcoholic negates to realize it is due to their excess drinking that is causing alcohol dependency.

This, the liquidation, is because of the QE policies in place to respond to the inflationary boom and the continual recession of 2007. Just as the elongated hangover is a response to the hair of the dog. We can deduce, through sheer logic, that the biting of the bullet of 2007, as opposed to the bailouts and QE, would have already corrected itself and we would not be in the sense of market turmoil we are in today. I see, QE 4 looming around the corner. Which will only prolong the inevitable.